Mr. Candeias

Revenue Management

It Takes Two to Tango: Sales Management and Revenue Management

By Mario Candeias, Regional Director, Lisbon, Pestana Hotels and Resorts

Revenue Management (RM) has taken a lead role in the generation of an optimized top line. As it is technologically based and technology has taken over the world, RM benefited from those tailwinds in its rise to supremacy. Such, that most literature, research and general writings have been almost exclusively focusing on it. That is not a problem per se. But RM is merely a fraction of the top line. Sales is the "big picture" and RM is a function of it, not the other way around. Sales must recover its leading role, as without it, RM is nothing but a one-legged body. Yes, it's all about Revenue Management nowadays. This, so to say, discipline has pretty much surfaced to the limelight of Hospitality Management, even being considered now critical in the job description of hotel leaders.

It became mainstream, rather than just the task of young "nerdie" folk getting some pricing and distribution insights and targets from leaders and implementing it through Excel and other dedicated software that most wouldn't understand. Revenue Managers certainly conquered centrality within hotel organizations, after doing the same in the airline business.

It is obvious that, in an ever fiercer and faster business world, optimizing revenues became the do or die for many organizations, especially the ones operating with fixed inventory (thus, highly perishable). Mathematicians and statisticians were also brought to the scene, to add science and automation to software that would increase intellectual capital levels and would ease achieving that edge, that extra-mile and, also, that "feel good factor" that comes with the notion that one is at the forefront of things and doing more than all others to extract that extra buck from them and from the market. We were and still are operating under the perception that Revenue Management increases the market.

While it may do so, the dimension of it is in my view very limited. In its role of optimizer, Revenue Management operates on top of something that already exists. So, we need to satisfy some conditions ex-ante in order to be able to optimize.TThose conditions, so to speak, are Sales. Yes. Good old school Sales. We need to sell first, to be able to optimize sales afterwards. If we don't first sell and bring occupancy levels and rates to a certain level, Revenue Management won't on its own cut it. It will be good for almost nothing.

So, the argument is that we must bring Sales (and Marketing) to its previous glory days or else we will not be able to optimize anything much and, while Revenue Managers will tell us that they are doing their best and will still be optimizing something, the base for optimization is small or low and nothing optimal will come to fruition in the end.

Confused? Well, we're talking about a sensitive topic which, as many others, has been under the so called "herd mentality", where everybody thinks more or less the same about everything. Even if it is wrong. In this case, the real value generating mindset will be the one that thinks differently from that and actually capitalizes on the reality of facts, not on the perception of facts.

First Things First

The first act of Revenue Management (or optimization) is having a real notion of the potential value of your asset. Revenue Managers don't think out-of-the box. They can't do it much as when they become involved the asset already exists and is operating. So, they tend to operate within boundaries which are previously set by rate or price lists, a given pricing hierarchy or pyramid, aligned for different segments (transient direct, transient corporate, tour operation, group business, etc.). Yes, Revenue Managers are mostly locked in a kind of rate straitjacket from which they cannot escape.

And these rate boundaries come first from the hotel owners and/or hotel leadership. When projecting and designing the asset, there are a few critical decisions for optimizing revenues (months or years before Revenue Managers come onto the scene). For example: given the location of the asset, what would be the potential rate? Given existing and future competitors, what positioning should the asset have? Midscale? Upscale? Luxury? At what price level will the returns for the investment be secured? At what rate and occupancy levels will the cash flow stream be satisfied to service debt and equity return expectations?

If one holds an asset, say a midscale one, in a prime location, the right Revenue Management decision would be to upgrade the asset into higher categories. Extend services, add refinement to the product and really overhaul the rate structure to that new market segment. This, your Revenue Manager can't do for you. Most cannot even recommend it to you, because there's a lack of vision (which unfortunately is not part of the job description).This assessment is vital for one to not undersell and, thus, to not create value at potential levels. Do note that your Revenue Manager will still be optimizing sales, but he cannot do more than operating within boundaries previously set by the asset's positioning in the market.

On the other hand, if your asset is poorly located and you are running a top end of the market property, a revenue optimizing asset-based decision could be (handle with care, please…) to downgrade your property into lower end segments. Optimizing is not just about strategically increasing rates, it may also relate to decreasing them if you perceive this decision will create more value (brings in more cash flow and thus increases the value of your asset). It is essential that your Revenue Manager be able to assert, detect and report whenever your property is operating at its "Strategic Threshold", so to evolve and push it up to the next level (the entire property and not just the rate).

After properly assessing your asset, you then need to optimize Room types or categories. This is another form of Revenue Management, which sits right there at the base and core of things. Interpret your room types correctly (location, view, dimension, assigned services, branded floors, amenities, room naming and branding, etc.) and your rate structure will certainly improve and increase right from the start, because you would have created room to increase your master rates, from which Revenue Managers can then operate into yielding them. Do note that you can do this along the way, even if your property has long been operating in the market. If you feel and see the demand for it. Or if you want to build it. Or if you can build it.

Now comes the Sales Team. After the project is complete (the investment), they will come up with rate structure proposals, dates, segments, room types, terms and conditions. It is important they fully assess the market. When I say fully, I mean not only direct competitors, but future potential competitors in the development pipeline, historic data on these competitors and, most importantly, information on the destination. The data on country, city or resort average prices, flight capacity, competitor concentration, future hotel pipeline, benchmarks, destination value, etc. All this is factored into your rates. Or it should be.

Afterwards, your Sales Team (together with your Marketing Team if they are not one and the same) will work out ways and strategies to actually build demand up to sustainable levels. Depending on your average daily rate levels and your investment profile and return needs, sustainability should come at around 50% per year.

Only when you start to achieve this "operating height", so to speak, will Revenue Management start to play an important role. Without all this previous framework and actual work, the base from which Revenue Management operates, and the case for its very existence, will be poor, inconsistent and essentially not solid.

No Sales, No Yield - Sell First, Yield After

We also need to note that, even at such occupancy levels, a considerable portion of this demand is not so yieldable. Just to give you an example of old school off-line tour operation models, still in powerful demand in Europe for example. They analyze resort leisure hotels, pure holidaying. It's almost completely off-line, with contracts signed one year in advance, with no possibility to yield once your occupancy levels start to climb as you go into peak season.

In this case, it's your Sales Manager, not your Revenue Manager, that will be responsible for all the yield. When? At the time when you sign your contracts (once or twice a year). A tougher call, as you can't make corrections after you have signed the contract.

In this case, your Revenue Manager will try and yield the overall mix of demand, but if tour operation is your core business, there's not much he will be able to do, at least materially.

In conclusion, and this is quite worrisome, there is a need to properly measure the production of Revenue Management. It is in many ways the same problem we have with Marketing (how much does Marketing really materially produce). In other words, the amount or value it actually produces from its optimization function and not the entire hotel production. There are still no adequate tools to measure the impact of Revenue Management in overall sales. I mean, how much are your "un-yielded sales" versus your "yielded sales". The difference would be what Revenue Management would have actually and autonomously brought in.

Revenue Management is still an "animal in the making". It is far from being the center of any organization. It is far from its full economic potential. It deserves to be in the spotlight, but not alone. It would be a headless chicken if Sales & Marketing weren't there at first and along the way.

After all, it takes two to Tango.

Mário Candeias is a 23-year hotel veteran, currently serving as Regional Director Lisbon of Pestana's Luxury Hotels, the luxury segment of Pestana Hotels & Resorts. Pestana is Portugal’s leading hotel chain, operating over 90 properties in 15 countries, with assets valued in over €1 billion. He is currently based in Lisbon, managing Pestana’s luxury hotels affiliated to The Leading Hotels of the World, of which it is the largest operator in the Iberian Peninsula (by room count), namely the world-acclaimed Pestana Palace, Hotel & National Monument. He previously worked for other prestigious Portuguese hotel brands, in the luxury and upper upscale segments, managing both resort and urban properties. Mr. Candeias can be contacted at 351-210-428-426 or mario.candeias@pestana.com Please visit www.pestana.com for more information. Extended Bio...

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